When looking for vehicle financing, people tend to look at the first thing that they see. It makes sense, everyone wants to pay as little as they can for their vehicle. My objective here is to help you do just that while avoiding unrealistic promises of online advertisers and big box retailers that push one-size-fits-all solutions. Today, I highlight what you need to know when comparing financing rates.
When looking at the rate of interest you’re paying, the percentage is often the most-advertised thing to draw shoppers in. Nothing sounds better than 0% because it means no interest, right? Wrong. 0% interest offers do exist, but they often come with caveats such as for the first three months or on select vehicles. It’s important to know these details before making any commitments.
When you’re offered an interest rate, that number is decided by your potential lender based on your current credit situation. This includes things like your credit rating, current debt, current income, employment status and more. Many lenders have different approaches to loan repayment based on your interest rate. One of the most common approaches that we see is amortized interest. This means that every time you make a payment, you’re paying that percentage against the principal (cost of the loan) that remains, rather than an even amount of interest and principal each month.
If one dealership is offering a promotion on interest rates, read the fine print. The finance rates and payments available to each individual varies. If you have amazing credit, you’ll be eligible for a lower rate than someone who has had credit slip-ups in the past. It makes sense that lenders want to know they’ll be able to recuperate the funds that they’re lending out.
When deciding upon an interest rate, lenders consider the following items I’ve highlighted above. Here’s what they mean:
Your credit rating: how strong your history of repaying credit is
Your current debt: do you have too much debt owing to other sources? Even if you have great credit, a smart lender won’t provide you with a loan if you’re already spending too much of your income elsewhere
Your current income: can you afford to repay the loan each month?
Your employment status: do you have a sustainable and reliable source of income?
Just to get started. Each lender may use a slightly different algorithm, and that’s okay. As long as you’re taking the best care of your credit possible you should be suited to find an affordable loan for your lifestyle. Consider these factors when looking for a loan and be realistic. If you have had credit blemishes in the past, you likely won’t find yourself with 0% offers. The good news is that if you have had a slip-up and you find a 5% payment (for example) and consistently pay it back in full and on time, you will likely be able to refinance down the road at a lower rate.
The thing about comparing rates is that they differ between banks and lenders. When you work with a finance professional, such as myself, you’ll be working with someone who can make these estimates for you. Based on experience, I’ll be able to give you an estimated range that you can expect based on your credit situation. From there, I’ll let you know what lenders would be your best options to submit applications to.
It’s important not to submit application after application, and some people will try this. When you submit a credit application, your credit file is pulled and it makes a small “dent” in your credit. Applying for too much credit, especially in rapid succession, can be damaging to your overall score. This won’t help you get a better rate on your vehicle loan. I’ll submit your application to the lender that is most likely to give you the best rate based on your individual situation, with an estimate of what it will be prior to submitting. This way, you’re getting a great rate without submitting more applications than you need.